Is Demography Destiny?

Australia had a bonanza of major reports handed down in the past week commissioned by the Federal government on the challenges and opportunities for the nation to retain its position as one of the most liveable places on earth.

The Intergenerational Report points to the extraordinary expenditure required to support an aging population; while the Re:Think Tax Discussion paper confirmed yet again the tax revenue system is not fit for purpose; and Review of Competition Policy suggests deeper and wider competition could serve the nation better.

Is there any common ground between these reports and what does it mean for Australia’s infrastructure future? Over the coming days, I will comment briefly on each report, starting with the Intergenerational Report now.

Many skilled analysts have fallen into the trap of overplaying the importance of demography by going so far as to argue: demography is destiny for nations.

The thought provoking Equity Guilt studies from Barclays reported in The Economist is a case in point. In 2005 based on population predictions, they expected bond yields would rise 5 percentage points per decade, making them about 9% now. Of course, the prediction has been wildly wrong, not because of a major demographic shift but rather there have been multiple other factors like, GFC, Europe’s debt crisis and quantitative easing.

Interestingly, from an infrastructure perspective the most recent Barclay study has identified another demographic theme, the aging population and its impact through de-accumulation of national savings. The upshot is an expected strong head wind for asset prices in coming decades.

Time will tell whether that is the case,; so far there is only evidence to the contrary when it comes to infrastructure assets.

Recent prices paid for major infrastructure (like Port Botany, Port Newcastle in NSW, Australia) by global pension funds fully exposed to these demographic trends are paying historical highs (+25 times revenue) for the privilege of ownership.

Over playing demography is one risk but the bigger risk is to ignore it altogether. Demography can still tell an awful lot about the future. It is for this reason that national infrastructure planning should be more closely linked to, and informed by the Intergenerational Report if the authors went one step further in their analysis.

Australians have peculiar land settlement patterns where vast bulk of the population cling to an 80km littoral ribbon running from Brisbane to Melbourne.

The missing link in the Intergenerational Report is for the demographic outlook to be given some basic spatial detail. It would be very helpful for all levels of government to have a basic understanding of the expected settlement patterns and population size that will evolve as we track towards the 22nd Century. But too many politicians deem this type of scenario-based information as too sensitive; they do so at the cost of the nation.

Population projections at postcode level can be extremely valuable, especially over the next 20 years to inform transport and land use planning. It also provides a firmer foundation to reason about what decisions should be made today to ensure future policymakers have good options to deliver the services demanded tomorrow by the community.

Creating and preserving land corridors for transport and utilities is critical. Without it the costs of basic services will be harder to deliver and certainly more expensive. The simple acceptance that land use planning and transport planning is the same thing, would save the nation billions of dollars every year.

Instead there is a lack of willingness to engage the community on the types of questions and issues that go to the heart of championing a sound infrastructure governance process.

Community consultation and trust with our policymakers is very important, and unfortunately trust is trending down. Population and demographic trends provide one of the few evidence bases that can be relied upon to inform better infrastructure decisions.

The Federal Treasury recently stated that the long-term fiscal outlook for Australia is that we can expect to not produce a single ‘budget surplus’ for the next 40 years on current policy settings.

Could it be that too many of our current policy settings are feeding back, contradicting one another and exacerbating the fiscal, economic and social challenges we are trying to fix in the first place; calling for even more taxes and more expenditure.

Can we stop this unvirtuous cycle?

I will revisit this question shortly when I look at the Re:Think Tax Discussion Paper next time.

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One thought on “Is Demography Destiny?”

Excellent analysis Garry!. If regarding infrastructure there’s no doubt Man successfully dealt with problems derived from orography, shouldn’t fail in doing so with those created by demography… All thinking in that space is indeed needed. Remember objective is to do double with half for twice!